One key factor behind successful investing is the correct identification of overpriced stocks and fairly priced stocks. In practice, overvalued stocks and the correctly priced ones are mingled in such a way that distinguishing them is a tough task for investors. However, investors who can identify the overhyped toxic stocks and discard them at the right time are the ones who stand to benefit.
Usually toxic companies are vulnerable to external onslaughts and burdened with huge debts. Irrationally high price of the toxic stocks is short-lived as their current price exceeds their inherent value and these stocks are bound to result in loss for investors over time.
Higher price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. If you own such stocks for a long period of time, you are bound to see a significantloss in your wealth.
If you can, however, accurately figure outthetoxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows you to sell a stock first and then buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like identifying stocks with growth potential, pinpointing toxic stocks and dumping them at the right time is the key to safeguard your portfolio from big losses or make profits by short selling them.
Here is a winning strategy that will help you identify overpriced toxic stocks:
- Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies high leverage. High leverage indicates a huge level of repayment that the company has to make in connection with the debt amount.
- P/E using 12-month forward EPS estimate greater than 50: A very high forward P/E implies that a stock is highly overvalued.
- % Change in F (1) and F (2) Estimate (12 Weeks) less than -5: Negative EPS estimate revision for this and the next fiscal year during the past 12 weeks points to analysts’ pessimism.
- Zacks Rank more than or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market.
Here are five of the 17 toxic stocks that showed up on the screen:
Oklahoma City, OK-based Continental Resources, Inc. (CLR) is engaged in the exploration, development and production of crude oil and natural gas properties in the north, south, and east regions of the U.S. Over the past one-month period, its current quarter estimate has remained unchanged at a loss of 10 cents. Currently, the company carries a Zacks Rank #3.
Live Nation Entertainment, Inc. (LYV) is a Beverly Hills, CA-based live entertainment company. Over the past one-month period, itsquarterly loss estimate widened from a loss of 42 cents to a loss of 49 cents. The stock currently has a Zacks Rank #3.
Pittsburgh, PA-based United States Steel Corporation (X) is engaged in the manufacture and selling of a variety of steel mill products, coke and taconite pellets.Over the past one-month period, its current quarter earnings estimates declined 66.7% to 5 cents a share. Currently, the company carries a Zacks Rank #3.
Houston, TX-based Cabot Oil & Gas Corporation (COG) is an oil and gas company engaged in the exploration, development, acquisition and exploitation of oil and gas properties in the U.S. Over the past one-month period, its quarterly estimate has declined 33.3% to 2 cents. The stock currently has a Zacks Rank #3.
Abercrombie & Fitch Co. (ANF) is a New Albany, OH-based specialty retailer. Over the past one-month period, its quarterly estimate has declined 25.7% to 81 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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